Packaging delivers

Last year, we undertook a large report on packaging (http://bit.ly/2gBCJST). We clearly had to go outside of our traditional focus area of fiber-based packaging to look at the size of the global packaging sector.

If we take the global packaging sector, paperboard is still the most significant portion of that, with plastics being marginally behind. There is though a potential slight misinterpretation because of flexible packaging: this is mainly plastics with some paper in it as well. If you take the plastics part of flexibles and include that, then plastics is actually a bigger sector.

When we look at the packaging market by region, we don’t see our typical split of broadly one-third Americas, one-third Asia and Africa, one-third Europe. In this case, Asia is bigger, and that is purely linked to the bigger population in Asia and packaging being used on a more personal level/final customer level.

Which of these sectors are growing? Is paper packaging growing? Is plastics? And the short answer is we believe that they are both growing. Paperboard growth is slightly less than that of plastics, and as such it is losing market share to plastics. But the key point is that this is a growth sector, with all elements of the global packaging sector growing.

If we take that on a regional basis, we see a similar story. We see packaging growing in every region of the world. Admittedly, Western Europe is growing at the lowest rate of around 1 percent compared with very high rates in Asia Pacific. Packaging is a growth area, regardless of how we segment it in terms of geography and in terms of material.

Paper packaging—containerboard, carton board and sack paper—accounts for almost half of the global paper sector. On top of that, we’ve also got the tissue sector at a little under 10 percent, the graphic sector at around 30 percent and others, such as specialty papers, making up the rest.

A growth area

I talked about the packaging sector being a growth area, and indeed the global paper sector is also a growth area. It is sometimes a factor that we tend to forget when we look at the challenges the European industry is having. But that growth is far more variable than what we see in packaging. We’re generally seeing a decline in graphics paper, growth in tissue, growth in packaging and a very small decline in other grades—when we segment those, some specialty grades are declining rapidly and some are increasing tremendously.

Packaging is very much the growth engine for the global pulp and paper sector. Containerboard and packaging are major parts of this growth engine. When we want to look at what we might expect into the future in Europe, it is a good idea to look at the trends and the relationships that packaging has with other factors.

If we go back in history, we can see very good correlations. Containerboard demand declined as we went into recession in late 2008 and early 2009, peaked after the recession in late 2010 before coming back to more stable levels through 2015, and we would at least expect that to continue through 2020.

If we compare containerboard demand with GDP (gross domestic product) and with industrial production, we see what I think is a very good correlation; we see peaks and troughs in the same areas.

As we look to the future, do we expect to see industrial production grow year on year and do we expect GDP to continue to be positive year on year? Our expectations would be yes, and therefore we expect demand for containerboard to increase also.

When we look at China, we compare the product consumption in China—the amount of stuff China consumes—with the amount of containerboard it consumes, and the correlation is incredible. We would certainly expect that into the future the amount of material that China consumes will continue to increase, and thus with it demand for containerboard will increase.

We see similar correlations for other regions of the world, and they tell different stories. But the key takeaway is that if we expect people to continue to consume more material, unless there is something disruptive in the market, we surely expect people to consume more containerboard.

Virgin versus recovered fiber

Regarding the split between recovered paper and virgin fiber, we know there are big differences in different corners of the world. Nonetheless, what we are seeing are significant amounts of recovered paper across the major global regions, but what does that mean going forward in terms of the development that we’ve seen recently? We have seen and we will still see some increase in virgin fiber-based capacity, but almost all the growth in containerboard that we are seeing is coming from the recovered fiber sector.

We expect the global pulp and paper sector to be in growth, and as such we expect the fiber sector that feeds the pulp and paper sector also to be in growth; it is a natural follow-on. But, again, there are some winners and there are some losers—some areas of growth and some pockets of decline.

Recovered paper is clearly the main growing fiber source for the global pulp and paper sector. But we’re also expecting to see significant increases in market pulp. The amount of market pulp that has been generated, particularly in Latin America, is still increasing significantly. We don’t expect to see any change in that, but we do expect to see a small decline in integrated production.

Bringing this discussion to recovered paper generation and consumption, it is very clear to everybody that China has been so phenomenally important in terms of the recovered paper market recently, and the importance of China will not change over the next few decades.

We have seen a significant increase in the volume of recovered paper that is being collected in China, and we expect that collection to continue to increase. But we don’t believe the collection rate in China can increase significantly from where it is at the moment. We believe that the collection rates in China are fundamentally approaching maximum levels. What we do believe is that China will consume a lot more material itself, and as such China will increase the volume of paper it is collecting substantially over the next 15 years but not because its collection rates will increase from where they are at the moment; it is purely based on volumes of product that are out there on the market. In the rest of Asia, though, we do see some opportunities for increased collections.

Supply stress

Bringing this to a grade-based level—mixed, OCC (old corrugated containers), newspapers and magazines and high grades—across the global pulp and paper industry, we are expecting a decline in newsprint, and as such a decline in newspapers and magazines being used [as furnish] by that sector will follow. We see some changes in the printing and writing sector in terms of recovered paper demand, but nothing so substantial. We expect to see the amount of recovered paper the tissue industry uses increase, but that is purely on volume terms. We are very convinced that the tissue industry has proportionately moved more toward virgin fiber, and there are multiple reasons around that. However, given the levels of growth we expect to see in tissue, then it will need more recovered paper.

The amount of market pulp that has been generated, particularly in Latin America, is still increasing significantly. We don’t expect to see any change in that, but we do expect to see a small decline in integrated production.

Containerboard and carton board are the two that make the difference; they take the lion’s share of the growth that we are seeing in the global pulp and paper sector.

What does this mean in terms of brown grades consumption? By brown grades I’m talking about mixed and OCC together because knowing that there is some degree of interchange between the two. If we add together China and the rest of Asia Pacific, the vast majority of growth is coming from these regions and it is a number in the region of 40 million metric tons additional material over the next 10 years on an annual basis. It is clearly massively significant. We believe this demand will fundamentally stress the market in terms of price and volume. A good portion of that will come from China as it collects more material, but we can only expect to see the markets in Europe, North America and Japan continue to be increasingly stressed. That is a significant level of change to expect over the coming decade.

Unforeseen developments

I would like to finish with this thought. Fifteen years ago, I was working in a paper mill in East London in the U.K. as one of the two production managers. Part of my responsibility was to buy 220,000 metric tons of recovered paper each year. We had a single supplier agreement, and I had someone I spoke with every day who sourced the material for us. Fifteen years ago, I had a phone call from this person to say he needed to increase the price of OCC to our paper mill in London by £5 per metric ton. We were not having an easy time in terms of financial performance; indeed, the paper mill doesn’t exist anymore. £5 per metric ton made a significant difference to us.

The supplier said to me, “I know you are going to find this hard to believe, but there’s a mill somewhere in China with big growth aspirations that wants to buy our material, and if we don’t increase our price, we really need to start selling to them.”

I felt quite in tune with the market, yet I felt this was pure nonsense. But I spoke with my supplier for quite a while, and eventually I became convinced; albeit, I didn’t find it easy to explain to the mill manager. Clearly the story was a lot truer than I thought.

I was thinking about this, and that is a lot of change to see in 15 years. Then to look at where we need to be in 10 years’ time and the changes we might see, it is quite frightening what could be around the corner.

David Powlson is director at Pöyry Management Consulting. He is in London and can be emailed at david.powlson@poyry.com.